Banking sector emerges from financial wilderness

Acleda Bank’s sparkling headquarters in Phnom Penh reflects the rapid growth of financial services in Cambodia, where 24 commercial banks now compete to fund the Kingdom’s development and provide a safe haven for personal wealth away from the traditional hoarding of gold and jewelry.

Out of the rouge,

into the black

1954

Bational Bank of Cambodia established following independence from France. Begins printing riels.

1975

Ultra -communist Khmer Rouge takes Phnom Penh and blows up the National Bank building. Money is outlawed for the next three-and-a-half years.

1979

Vietnamese-backed government begins massive challenge of rebuilding Cambodia’s financial services. It many ways, the rebuilding remains a work in progress.

1989

Government renounces communism; turns to market economics.

1999

Foreign banks are guaranteed rights and obligations equal to local banks. There are no restrictions on foreign ownership of banks.

November 2000

A restructuring initiative by the National Bank leads to the de-licensing and liquidation of 12 banks that fail to increase their paid-up capital from $5 million to a new minimum of $13 million.

2006
Outstanding personal and business loans reach $893.6 million, having increased almost 90 percent over two years from $471.6 million in 2004.

After decades in the wilderness, Cambodia’s financial sector is finally starting to make inroads into the country’s vast, largely unregulated cash-based economy. But despite recent progress, there is still a long way to go in reform and transparency if growth is to be maintained long-term, say economic analysts and industry experts.

Over the past few years, the country’s double-digit annual growth rates have led to a rapid expansion in retail and commercial banking, with outstanding personal and business loans rising from a total of $471.6 million in 2004 to $893.6 million two years later, according to figures from the International Finance Corporation (IFC).

In its latest annual Asian Banking Outlook report, global credit rating firm Moody’s has painted an optimistic picture of the Kingdom’s business sector, predicting economic growth of 7.2 percent in 2008 and financial stability over the next 12-18 months despite the recent global credit crunch.

“In Cambodia, public confidence in the banking system is recovering,” said the report, a development it put down to sustained economic growth, increasing personal wealth and a stable regulatory environment.

Since the restoration of private property rights in 1989, the National Bank of Cambodia has been leading the government effort to reform and develop the financial sector.

Acleda Bank president and CEO In Channy credited the sector’s increasing stability to the passing of the 1999 Laws on Banking and Financial Institutions, which created the transparency and predictability necessary to build trust in the financial sector.

“The level of trust in the banking industry has increased because of this law,” he said. “The public trusts banks more now because banks have to issue detailed financial statements.”

Channy said that this increase in trust was demonstrated by the rapid growth in Acleda’s domestic deposits, which climbed from $800 million in 2004 to $2.5 billion in April this year.

“More competition is coming. Investors now feel comfortable coming to Cambodia,” he added.

Cleaning house

In November 2000, a bank restructuring initiative by the National Bank led to the de-licensing and liquidation of 12 banks that had failed meet a new requirement that they increase their base capital from $5 million to $13 million.

According to the Asian Development Bank’s 2001-10 Financial Sector Blueprint from December 2001, the initiative underscored the government’s awareness of “improving the soundness and reliability of the banking system, which is crucial for confidence building.”

But Cambodia’s chaotic recent history, coupled with the country’s grinding poverty and chronic corruption, have inspired anything but financial confidence.

After marching into Phnom Penh in April 1975, the Maoist Khmer Rouge dynamited Cambodia’s then-new National Bank building, sending worthless banknotes blowing through the streets of the deserted capital. For the three-and-a-half years of Pol Pot’s rule, the use of money was outlawed and the economy crumbled.

The Vietnamese-backed government that toppled the Khmer Rouge in 1979 was then faced with the challenge of building a functioning financial system from the ground up, a development that is still, in many ways, a work-in-progress.

The banking sector is now growing very fast. Confidence and trust have been gained from the public. That’s our greatest achievement.

–Phan Ho, National Bank deputy director general

But National Bank deputy director general Phan Ho said that the government’s reforms have proven very successful in establishing a baseline of consumer and business confidence upon which future reforms can build.
“The banking sector is now growing very fast,” said Ho. “Confidence and trust have been gained from the public. That’s our greatest achievement.”

But despite steady growth and a more stable regulatory framework, Cambodia’s banking and financial sector remains a small part of an overwhelmingly cash-based economy, with bank deposits constituting just 18 percent of GDP in 2007, and even then concentrated mostly in the capital and larger provincial towns.

According to the Financial Sector Diagnostic report released by the IFC in June 2007, “a well-developed public infrastructure has not been established, [including] relevant business laws, an efficient and independent judiciary, regulation and supervision of other financial markets, and a secure and efficient payment and clearing system.”

Still, ADB economics and financial sector officer Vanndy Hem said that Cambodia has made great strides.

“If we look back from where the sector started, the achievements we see today are solid and fundamental to the future development of Cambodia. Key among those are the restored confidence of the public in the system [and] the steady shift from the informal to formal usage of the system,” he said.

“Cambodia should be applauded for its achievements in introducing some fundamental laws and regulations, [but] the real challenge is how we can ensure that they are carried out,” he said.

Raising standards

According to Acleda Bank vice chairman John Brinsden, the arrival of foreign-owned banks in Cambodia has raised the bar beyond the formal regulatory framework.

“In Cambodia the four largest foreign banks (Canadia Bank, Acleda, ANZ Royal and Campu Bank) dominate, then there’s a large gap before you come to the rest,” said Brinsden.

Although foreign-owned banks have been allowed to operate in Cambodia since the UNTAC period of the early 1990s, it’s only in the past five years that the arrival of large, consumer-oriented banks such as ANZ Royal has pushed up the standards of smaller local and regional institutions.

ANZ Royal CEO Stephen Higgins said that his bank has held itself to the same high standard in Cambodia as it does in Australia and New Zealand.

“We’ve brought some innovative banking practices here: the branches, the ATMs,” he said. “ANZ Royal was an international quality bank, coming into a country that was very much in need of it.”

Brinsden of Acleda agrees. “ANZ has really shaken things up here and has forced other banks to put in ATM networks,” he said. “In terms of customer service and transparency, they’ve caused some of the local banks to raise their game a little.”